SIVA SIVANI INSTITUTE OF MANAGEMENT

Course Outline & Lesson Plan

INTERNATIONAL BANKING

Batch : PGDM BIFAAS III Batch (2009-2011)
Term : V
Credits : 1.5 (halI credit)
Prerequisite: A Iair understanding oI Banking, International Iinance and
Iinancial system,
Facilitator: ProI VG Chari.


COURSE OB1ECTIVE:

Banks perIorm the Iunction oI Iinancial intermediation in an eIIective manner.
Lately, internationalization or globalization oI banks is being witnessed across
the globe. Banks in many nations have internationalized their operations since
1970. International banking signiIies the presence oI banking Iacilities in more
than one country. International banking comprises a range oI transactions and
activity having a cross-border and / or cross-currency element.

This course is designed to achieve the Iollowing objectives:

1. To understand the international banking.
2. To gain in-depth knowledge on international banking operations.
3. To discuss the trade Iinance and support agencies to banking.

TEXT BOOK & READING MATERIAL

BASIC TEXT:
1. Fundamentals oI International Banking :
By Rupnarayan Bose (2007)
(1
st
edition) Publishers: Macmillan India Ltd.

This book broadly covers the syllabus and is widely used by students. The
students are expected to go through the prescribed topics beIore coming to the
relevant session so that meaningIul discussion can take place without much oI
digression and wastage oI time.

ADDITIONAL READINGS SUGGESTED :

O Management oI Banking and Financial Services Justin Paul and
Padmalatha Suresh

O IIBF Publications.

O International Banking The ICFAI University publication (2006)

O RBI Bulletins & website
O Economic Times
O The Hindu Business Line
O Business Magazines
O Forex related websites

The students are advised to access library to go through the above suggested
readings to take up the work oI case analysis, problem solving and assignments.
Wherever required students should Iurnish the reIerence and provide supporting
calculations through Excel sheets. Otherwise the students will not able to get the
required marks.

PEDAGOGY:

The pedagogy to be Iollowed will be completely based on the students Iollow up.
It will be a mix oI case based lectures, problem solving, student interaction and
student`s presentation. The majority oI the learning will take place oII the class
room in a subject like International Banking and class room sessions will be used
Ior discussing what has been learnt outside the class room. High importance will
be given for students` preparation for the sessions.
The Facilitators` eIIort will be Iocused in providing a learning environment Ior
the student rather than spoon Ieeding` the student.

Case Analysis:

Cases are to be discussed in class. Most cases do not have right` answers. Being
right` or wrong` should not be your concern, when participating or deciding
whether to make a comment. The class in interested in your point oI view and iI
there is a consensus that diIIers Irom your view point, that in no way diminishes
the value oI your contribution. Don`t be aIraid to disagree with comments by
your Iellow students. II there is complete agreement on case solutions then
something is wrong. Critical discussion and disagreement are to be expected and
encouraged. A case brieI (as word document) has to be prepared by each group.
The groups are expected to come prepared with their own workings in excel
sheet. A concise, well-organized, insightIul analysis is expected.
A suggested organization oI a case brieI:
a) details oI background knowledge required Ior solving the case
b) case background
c) various levels oI problem identiIied in the case
d) details oI your analysis and your interpretations
e) speciIic recommendations and implementation
I) Iinal conclusion

The negligence oI any member oI the group can be reported to the Facilitator
immediately. The quality and quantity oI comments and questions count most.
The case analysis will be evaluated at group level and also individual level. II any
member Iound that he has not contributed signiIicantly, the whole group will be
held responsible Ior Ialse reporting.


CONTINUOUS INTERNAL ASSESSMENT (CIA)

QUIZZES:

Quizzes will be given periodically throughout the course Ior the students to
determine iI the subject presentations are Iully comprehended. The question
pattern Ior quizzes will be any or all oI multiple choice, Iill in the blanks, true or
Ialse, very short descriptive. Conduct oI the quizzes may be surprise or inIormed
in advance. There will no make-ups. A student absenting will do so at his/her
risk and lose marks. The number oI quizzes would be depending on the progress
and perIormance oI the students and tentatively planned to be 2 4. Each quiz
carries 10 marks. It may also carry negative marks.

ASSIGNMENT:

It provides an opportunity to get some hands-on experience in understanding and
applying International Banking principles in practice in various banks /
corporates. Students are required to understand the practices oI banks by doing
the Iollowing assignment.

a) IdentiIy any two big banks Indian or Foreign

b) IdentiIy the departments / Iunctions in the bank connected with international
banking.

c) How are the banks oIIering various international services?

d) How they are constituted and made known to customers?

e) What is the amount oI income earned by bank thro these activities?

More emphasis will be given on the case discussions and assignments.

EVALUATION

1. Major assignment 10
2. Class work (Minor assignments) 10
3. Quizzes 20
4. Class Attendance & Participation: 5
5. Cases discussions 15
6. End Term 40
TOTAL 100


SESSION PLAN


1. Globalisation and Liberalisation, BrieI History oI International Banking
#0,/3 Chapter 1 : Pages 1 4 (International Banking ICFAI University)
$088438 1
2. Organizational Ieatures oI International Banking International Banking
Department

#0,/3 : Chapter 1 : Pages 5 8 (International Banking ICFAI University)

$088438 1
Managing Foreign Exchange Operations - Dealing Room and Treasury
Operations Dealing Room Transaction Cycle

#0,/3: Chapter 13: Pages 145, 144, 146, 155 International Banking: R Bose
$0884381

4. International Remittances Nostro, Vostro, Loro and Mirror Accounts
Correspondent Banking
Reading : Chapter 3, 4 & 6 - International Banking: R Bose
Sessions : 1
5. Funds TransIer Relationship Banking Credit lines - SWIFT CHIPS
CHAPS FEDWIRE

Reading : Chapter 6 ( P 61- 65), Chapter 25 ( P 310,314,315,316)

Sessions: 1
6. NR Accounts
#0,/3: Handout
$088438 : 1
7. External Commercial Borrowings Raising Foreign Currency Loans

Reading : International Banking The ICFAI University publication (2006)

$088438: 2
8. Trade Finance Financing Imports thro Letter oI Credit LC Types

#0,/3: Chapter 23 International Banking: R Bose

$088438: 1
9. UCPDC Financing the Exports Pre Shipment Finance Post Shipment
Finance

#0,/3 : Chapter 24 International Banking: R Bose

$088438 ; 2

10. Role oI EXIM Bank ForIeiting - Risks in Foreign Trade

#0,/3 Chapter 25.9, 22.4, 24.12 International Banking: R Bose

$088438: 1

11. Role oI ECGC ECGC Policies and Guarantees.

#0,/3 : Chapter 25.10

$088438 : 1

12. Case studies
Enclosed cases
$088438: 3

GUEST LECTURES:
1. LCs and UCPDC Bank proIessional
2. NR Accounts Bank proIessional

Guest lectures will be arranged aIter completion oI relevant topics in the
syllabus.
ONote Quiz / Test will be conducted at the end of Four Sessions each.

OQuiz and Guest Lectures will be conducted in the After noon sessions
from 2:00 p.m. onwards.

OAttendance for the guest lecture is compulsory and students are
required to give feedback on the guest lecture.

OAbsence in the quiz will not be condoned and quiz will not be
reconducted.

OThere will not be any change in the schedules.

SYLLABUS
UNIT I

Globalisation and Liberalisation BrieI History oI International Banking
organizational Ieatures oI International Banking International Banking
Department Dealing Room and Treasury Operations Dealing Room
Transaction Cycle


UNIT II

International Remittances Nostro, Vostro, Loro and Mirror Accounts
Correspondent Banking Funds TransIer Relationship Banking Credit lines -
SWIFT CHIPS CHAPS FEDWIRE NRI Accounts - External Commercial
Borrowing Raising Foreign Currency Loans.

UNIT III

Trade Finance Financing Imports thro Letter oI Credit LC Types UCPDC
Financing the Exports Pre Shipment Finance Post Shipment Finance Role
oI EXIM Bank ForIeiting - Risks in Foreign Trade Role oI ECGC ECGC
Policies and Guarantees.

RECOMMENDED BOOK

O International Banking Rupnarayan Bose Macmillan India ltd (2007)

Additional readings:

O Management oI Banking and Financial Services Justin Paul and
Padmalatha Suresh

O IIBF Publications.

O International Banking The ICFAI University publication (2006)




CASE 1

IMF Takes Action To Stem Crisis.

"The International Monetary Fund (IMF) has activated an emergency Iinance
mechanism to help countries hit by the Iinancial crisis. IMF chieI Dominique
Strauss-Kahn said the lending procedure would allow the IMF to react quickly to
support countries Iacing Iunding problems. Strauss-Kahn said the events oI the
past Iew weeks were beginning to take their toll on emerging economies as credit
lines were cut and as trade was being hit by slowing demand in Western
economies. He said the IMF was ready to assist any country in need oI Iunding
through its emergency aid mechanism, set up in 1995 to help Mexico stabilize its
Iinancial system aIter a crisis oI conIidence that led to sharp declines in the
country's currency. The Philippines, Thailand, Korea and Indonesia also drew on
the mechanism to access billions oI dollars oI loans aIter the eruption oI the
Asian Iinancial crisis in 1997. |BBC News|

Reuters adds the IMF "has warned that the worst Iinancial crisis since the 1930s
Great Depression could inIlict lasting economic harm on the world. The IMF has
about $200 billion immediately available to lend to countries in need but can tap
other sources. He said the global economy was on the cusp oI recession but with
quick and IorceIul action, the spreading crisis could be contained." |Reuters
News/Factiva|

The Financial Times reports that European equities collapsed on Friday, leIt
vulnerable aIter a dramatic late sell-oII in New York extended the sustained
losing streak on world stock markets. Banks stocks once more Iaced heavy
selling as conIidence in the international Iinancial system continued to drain
away, taking major indices to Iresh 5-year lows.

The New York Times Iurther reports that "Iceland's Iinancial system collapsed
Thursday, and analysts said it was probably only a matter oI time beIore the
country would have to turn to the IMF Ior help. Such a move, which would make
this small island nation the Iirst sovereign state to Iall victim to the credit squeeze
that began last year, would require it to accept harsh measures to restore Iiscal
and monetary stability." |The New York Times|

Meanwhile, The Guardian writes that UK chancellor "Alistair Darling will urge
Britain's G7 partners today to consider emulating his emergency bail-out Ior their
banks. The chancellor expects the G7 and the IMF to beeI up their early warning
systems to prevent Iuture bubbles in Iinancial markets, and to provide a
comprehensive response to the credit crunch. 'We want to see these meetings
come up with practical action,' a Treasury source said." |The Guardian (UK)|

In a separate piece, Reuters adds that "Japan stands ready to help the International
Monetary Fund ride to the rescue oI countries struck down by the global credit
crisis, Finance Minister Shoichi Nakagawa said...The Nikkei newspaper reported
that Japan would propose making trillions oI dollars in currency reserves held by
Asian and Middle Eastern governments available to support IMF-led bailouts.
Japan alone has $995 billion in oIIicial Ioreign currency reserves. China has $2
trillion, the world's largest stockpile." |Reuters News/Factiva|

The Financial Times meanwhile writes that when Iinance ministers oI the world's
seven richest nations gather in Washington today, they hope to send the message
that they are united in Iighting the worst Iinancial crisis in almost a century. |The
Financial Times|

In related news, another Reuters piece suggests that "business is booming in the
trade Iinance market as exporters and importers return to a tried and tested Iorm
oI credit amid the chaos oI the Iinancial crisis, bankers in the sector say. Demand
Ior trade Iinance -- a traditional Iorm oI banking dating back to the Middle Ages -
- is so strong that some houses say they are turning away business Ior lack oI
capacity. But iI volumes are up, so is the price, with deals currently oIIered at
300 basis points over interbank reIinancing rates, three times or more the going
rate a year ago." And that is now making it hard Ior developing countries to
Iinance their exports, with Brazil sounding the alarm. Some bankers also Iear the
high prices could eventually see new business dry up. |Reuters News/Factiva|

CASE 2
EXOTIC OPTIONS AND CREDIT DERIVATIVES TURN CHAOTIC
B.YERRAM RAJU*
LiIe will never be the same again in the Iinancial world where the staunch private
market arguers turned to the State Treasury and Central Banks Ior the crises bail-
out. Risk Analysts oI repute at CREDITSIGHTS said amidst the crisis that 'the
growth oI the Credit DeIault Swaps (CDS) market over the past decade has
outpaced development oI settlement systems and trading inIrastructure. ' CDS
are just instruments that provide a Iorm oI insurance on Iixed-income assets. The
protection given to Fannie Mae and Freddie Mac necessitated the International
Swaps and Derivatives Association to launch a protocol to Iacilitate settlement oI
credit derivative trades involving these two Iirms. The take over oI Fannie Mae
and Freddie Mac, collapse oI Bear Stearns in March 2008 and the systemic crisis
that Iollowed triggered a deIault on credit deIault swaps instruments that
provide a Iorm oI insurance on Iixed-income assets. While the Dealers in the
market are working to settle these contracts, aIter deep threats, the $700bn bail-
out has been voted Iavorably by the US Congress. All the rules and regulations oI
Basel II could not rescue either the European Banks Irom near collapse and Iour
UK banks were nationalized in a matter oI just seven months. The villain oI the
piece is the exotic options and credit derivatives. The chaos they brought in
seems to be unending. Is Capital an adequate measure when greed perpetuates
and gilt-edged guarantees and securitization have the potential to increase the
moral hazard? How can we saIeguard the global Iinancial system and provide
architecture sturdier than the present? This paper would like to look at the current
regulations under Basel II in such backdrop.
Harder lessons had to come by. I recall an Occasional Paper oI the IMF (124 oI
1995) that had put down the impacts oI Iinancial liberalization on asset markets
oI Japan in the later halI oI 1980s. The increased lending to property markets that
Iuelled the boom in the prices oI both residential and commercial properties
boosting the value oI collaterals oI the SMEs Iollowed by a sharp economic
downturn adversely impacted on the Iinancial sector proIitability. The lessons oI
the Asian meltdown oI the 1990s, again due to the real estate markets` erratic
behaviour pepped up by the greed oI the Iinancial institutions were also
Iorgotten. The same Citi, Susan Credit, Merril Lynch, Lehman Brothers, the un-
repenting Credit Rating Agencies Iorgot the scratches and screaming quickly and
entered the sub-prime mortgage markets without demur. Even the US Savings-
Loan debacle oI the 1980s has been a Iorgotten history in that country`s Iinancial
circles.
The US crisis proved that even strong Iundamentals Ilounder against weak
regulation. 'Lax oversight did indeed allow Iinancial Iirms to borrow Iar more
than was prudent (a leverage ratio oI 30 or 40:1) to make bets that have gone
sour. Tougher regulations might have prevented this. (Economist 20th Sep 2008)
Alan Greenspan, extolled as the best US Fed Regulator Ior more than two
decades has neither to regret nor explain. It is ProI Bernanke`s unenviable task to
alter this legacy. Now the Investment Banks winding up in US are entering the
virgin Indian Financial Markets. Unless saIeguard measures oI the global
Iinancial system are revisited and put in place, there could be a burn-out oI the
emerging economies, ere long. The time is more opportune now than ever and
there are enough lessons to learn.
The much-abused and most-extolled market-led reIorms are now strongly
positioned against each other with the US Fed rescuing Bear Sterns, nationalizing
the tainted Fannie Mae and Freddie Mac, the two giant mortgage guaranteeing
institutions, inIusing capital oI the order oI $700bn to rescue the AIG Insurance
to prevent the global contagion eIIect aIter throwing Lehman Brothers to Iend Ior
themselves. When the Asian meltdown occurred, the Council oI Foreign
Relations had set up a Task Force with Carla A. Hills and Peter G. Peterson as
Co-Chair persons to suggest measures Ior saIeguarding the global Iinancial
system The Future International Financial Architecture. Some oI its
recommendations are worthy oI a revisit at this juncture as the content oI that
Report seemed to have been put in archives, notwithstanding its pitch Ior market-
related Iinancial sector reIorms that would 'create greater incentives Ior
borrowing countries to strengthen their crisis prevention eIIorts and Ior their
private creditors to assume their Iair share oI the burden associated with resolving
the crisis.
Good house-keeping had its Iirst ticket. Its advice to IMF: crisis-lending less
will do more. For country crises, the IMF should abandon huge rescue packages.
In this hour oI crises in the US, Washington trio is observing golden silence as its
role has been taken by the US Treasury Secretary. Task Force is tougher in the
measures it proposes to reduce moral hazard and to induce private creditors to
accept their Iair share oI the burden oI crisis resolution. Triple B` rated
mortgages were assigned triple A` ratings at counterparty derivative instruments
by all the leading Rating Agencies like the Fitch, Standard and Poor, Moodys
etc., with absolute impunity. Securities Industries and Financial Markets
Association`s Task Force recommended wide ranging reIorms oI the Credit
Rating agencies and transparency in rating methodologies. It is not yet known
whether such reIorms would be part oI the global Iinancial architecture. In the
context oI implementation oI Basel II tri-pilloried Risk Management heavily
depending on external credit ratings, it is but essential that the Credit Rating
Agencies globally should conIorm to the new reIorms suggested by SIFMA in
August 2008. It is time to cry halt to the paymaster calling shots on ratings.
Let me now look at what Basel II has to say on the derivatives. Basel II requires
valuation and analysis oI exotic options, over-the-counter (OTC) exotic
derivatives, and credit derivatives. Section 112 says: The comprehensive
approach Ior the treatment oI collateral will also be applied to calculate the
counterparty risk charges Ior OTC derivatives and repo-style transactions booked
in the trading book.` Where guarantees or credit derivatives are direct, explicit,
irrevocable and unconditional, and supervisors are satisIied that banks IulIill
certain minimum operational conditions relating to risk management processes
they may allow banks to take account oI such credit protection in calculating
credit requirements.` (Sec140) Basel II also expects that the maturity oI the
underlying exposure and the maturity oI the hedge should both be deIined
conservatively.. For the hedge, embedded options which may reduce the term oI
the hedge should be taken into account so that the shortest possible eIIective
maturity is use. But the US Banks did not choose to adopt Basel II and the
European counterparts were mauled and the disaster that Iollowed is everywhere
in print and the global contagion as a result oI indiscreetly rated exotic options
continues unhalted. Now that the Investment Banks are getting subsumed or
merged or bought over by the commercial banks, it is important to recognize the
compulsions Ior the Banks as well in respect oI counterparty risk: Banks will be
required to calculate counterparty credit risk charge Ior OTC derivatives, repo-
style transactions booked in the trading book, separate Irom the capital charge Ior
general market risk and speciIic risk. The risk weights to be used in this
calculation must be consistent with those used Ior calculating the capital
requirements in the banking book.
Exotic options are used in a variety oI settings in a bank, including the
applications oI general risk hedging and credit risk hedging. Banks should have
methodologies that enable them to assess the credit risk involved in exposures to
individual borrowers or counterparties as well as at the portIolio level. (Sec733)
The credit review assessment oI capital adequacy, at a minimum, should cover:
1.Risk rating systems; 2. PortIolio analysis/aggregation ; 3.
Securitization/complex derivatives ; and 4. Large exposures and risk
concentrations.
Pre-deal checks should be netted accurately in regard to portIolio-based
exposures. PortIolio Analysis is not just a pre-requisite under Basel II Accord. It
actually makes sense Ior a bank to manage its investments/loans portIolios: an
optimal portIolio can generate added proIits and lower expenses and required
economic capital Ior the bank.
Exposure at deIault (EAD) is only secondary to primary risk assessment.
Dimensions oI risk should guide risk managers to set timelines and their
management. Pre-deal limit checks should be perIormed via real-time interIace
the dedicated credit limits system and the Iront oIIice. Cost oI credit that includes
both the expected and unexpected losses should be held to the minimum and
separate to limit checking.
Banks that retain or acquire positions in securitization, or have an oII-balance-
sheet exposure in a securitization, have to hold capital with respect to these
interests. When combining derivatives (counterparty) exposures with the lending
exposures, the current Mark-to-market (MTM) exposures is the most appropriate
measure. The ability to set limits to control the maximum exposures to an issuer
is the most important aspect. The monitoring oI any concentration risk in certain
aspects oI securities is the next most important aspect while reviewing issuer
exposures with the credit limit exposures. Measurement model Ior issuer
holdings or security holdings should take into account a combination oI notional
value, market value and historical cost . The global limits system should monitor
compliance with all the terms and conditions oI Banking book Iacilities like
credit limits, LCs, Guarantees etc.
The Iinancial architecture developed under the shadow oI US Banking, where the
investment banks, broking institution, mutual Iunds, retail banking, asset
reconstruction companies, commercial banking, housing Iinance arms, insurance
companies, re-insurance companies, and advisories are under one rooI oI a
Holding Company under the garb oI eIIicient customer service, is Iraught with
severe risk. In India, where 70 percent oI banking is under the public sector Iold,
which eIIectively means that they are insulated Irom any misdemeanors oI the
nature that such combined operations could upset in the long run, we should not
move closer to bail-outs by the exchequer. It is perhaps worthwhile Ior the super
regulator in India to rethink the strategies Ior combating the operational risks
more eIIectively than now with higher capital allocation than now instead oI
allocating higher risk capital Ior credit risk deIault.